Antitrust Practice - Company Pays $550,000 Civil Penalty for Omitting 4(c) Documents from HSR Filing
On October 15, 2007, Iconix Brand Group, Inc. (“Iconix”) agreed to pay a $550,000 civil penalty for violating the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”). The civil penalty was the result of an investigation by the Antitrust Division of the United States Department of Justice (“DOJ”) into whether Iconix had failed to file certain documents required by HSR.
The DOJ and the Federal Trade Commission (“FTC”) have joint authority to review transactions as to which filings have been made under HSR. Here, neither agency had any substantive antitrust concerns with Iconix’s acquisition of the assets of Rocawear Licensing LLC (“Rocawear”). Nevertheless, after the acquisition was completed, the DOJ conducted an investigation to determine whether Iconix, in connection with its HSR filing, had failed to submit documents required to have been included in response to Item 4(c) of the HSR Notification and Report Form. Item 4(c) is not a new requirement, but it is perhaps the most critical, and often misunderstood, aspect of the HSR filing. Item 4(c) requires the filing person to submit:
all studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s) ... for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential sales growth or expansion into product or geographic markets….
Item 4(c) requires the filing person to search for, and include as part of its HSR filing, all documents that contain information responsive to Item 4(c). Documents include both formal materials (such as presentation materials furnished to the board of directors in considering a proposed transaction) and informal materials (such as handwritten notes and internal emails). Particularly in the case of an acquiring person, it is rare to have generated absolutely no Item 4(c) documents in the process of considering a merger or other acquisition.
Iconix filed its HSR Notification and Report Form with the FTC and DOJ on March 14, 2007. In that filing, Iconix indicated that there were no documents responsive to Item 4(c). Shortly after the filing was made, an FTC staff member contacted Iconix’s counsel to confirm the absence of any such documents, indicating that the lack of any such documents appeared unusual. Iconix’s counsel confirmed that Iconix had duly searched for Item 4(c) documents and that no such documents existed. In late March, the FTC and DOJ granted Iconix’s request for early termination of the HSR waiting period, and Iconix completed its acquisition of the Rocawear assets on March 30, 2007.
Despite their grant of early termination, the enforcement authorities remained skeptical that Iconix could undertake an asset acquisition requiring more than $200 million of financing without its officers and directors having prepared or reviewed documents that evaluated or analyzed the acquisition with regard to the competitive factors referenced in Item 4(c). As a result, within a week after Iconix completed the acquisition, the DOJ opened an investigation to determine whether Iconix had failed to provide Item 4(c) documents with its HSR filing.
In response to the DOJ’s civil investigative demand issued as part of that investigation, Iconix supplied a variety of documents to the DOJ. Those documents included (1) an internal email to several of Iconix’s officers and directors evaluating the proposed acquisition’s potential to expand into product and geographic markets; (2) a presentation sent to Iconix’s Executive Vice President charting Rocawear’s share of the market; and (3) materials prepared for Iconix’s Board of Directors that contained information about the market shares of Iconix and Rocawear. Each of these three documents contain exactly the kind of information that Item 4(c) is intended to collect, and each was prepared by or for Iconix directors or officers. They were responsive documents under Item 4(c) and were required to have been included in Iconix’s HSR filing.
In light of these responsive documents, Iconix filed a revised version of its HSR Notification and Report Form on May 23, 2007, containing documents responsive to Item 4(c), including the three documents that the DOJ’s investigation had uncovered. The revised HSR waiting period expired on June 22, 2007. Thus, Iconix was in continuous violation of HSR from March 30th (when it closed on the asset acquisition) through June 22nd (the expiration of the revised HSR waiting period), a total of 84 days.
The DOJ filed a complaint against Iconix for failing to comply with HSR for that 84-day period. HSR allows for a civil penalty of up to $11,000 per day, for each day a party is in violation of HSR – in the case of Iconix, a maximum possible civil penalty of $924,000. The DOJ and Iconix reached a settlement, with Iconix agreeing to pay a $550,000 civil penalty for its HSR violation.
Although HSR civil penalties have been assessed before for Item 4(c) violations, Iconix may represent the first time that a civil penalty arose out of a separate investigation opened by the enforcement authorities simply out of skepticism as to the absence of any documents responsive to Item 4(c). The fact that the investigation was launched, and the civil penalty assessed, even though the enforcement authorities had no substantive concerns with the acquisition itself, highlights how seriously they view compliance with the HSR filing requirements themselves. Iconix underscores the responsibility a transacting party has, in conducting its Item 4(c) search, to locate and produce all documents required by that item.
For questions on HSR requirements and compliance, contact:
June Ann Sauntry
Mitchell P. Portnoy
Lori H. Jones
Michael E. Hochman